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- Clarifying Terms: Lease Option Deposit -vs- Down Payment
These are two terms that are often mistakenly interchanged in a Lease Option Agreement. However they have two distinctively different meanings.
A Lease Option Deposit: is the amount of money the buyer comes to the table with, when going into a Lease Option Agreement. This Deposit is given to the current owner of the property as a "Good Will" or "Earnest" Deposit at the onset of the Lease Option and is used to secure the Lease Option Agreement.
A Down Payment: is the amount of money a buyer pays a Mortgage Company once the Lease Option is "exercised." This is a down payment in the traditional sense where the Mortgage Company that you will be purchasing the property through will require.
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- What is the typical term of a Lease Option?
They can be set for any pre-arranged length of time. However typical Lease Options are 12 months, to three years
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- Is there a down payment (deposit) requirement for a Lease Option?
Usually. (In a Lease Option agreement however, this is called a Lease Option Deposit rather than a Down Payment - See FAQ question 1). Although each seller will make this determination on their own, the deposit can range from $0 to over 20%; You can usually expect to pay between 2 and 5% for a lease option deposit.
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- Is the lease option deposit refundable if the option is not exercised?
Rarely. Real-estate investors are individual in their requirements and may allow a full or partial refund of the deposit, but it is very rare.
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- Is the initial Lease Option Deposit or any portion of the monthy payments refundable if the Lease Option is exercised?
This question should always be asked and clarified before entering into a Lease Option Agreement. The answers are many and vary by seller. But the three main trains of thought are:
Option 1: The deposit is deducted from the final sale price of the property But no portion of the monthly lease payment is deducted. For example, if you purchased a home for $100,000 with a lease option for 12 months and your deposit for the option was $5000 (or 5%) the amount you will have to get the loan for from a traditional lender at the exercising of the option will only be $95,000. In this scenario, you would typically have to come up with 20% (or $19,000) down payment on the $95,000 to pay the new mortgage company for a traditional loan. In this scenario none of the monthly rental payments are credited towards the down. (Turner Strategy Group typically used this option).
Option 2: The Lease Option Deposit is NOT refunded or credited towards the down, however a portion of the monthly rental payment does apply to the future down payment creating a type of forced savings for the buyer
A third option: is to purchase the home for the entire $100,000 (in this scenario), at the end of the Lease Option timeframe. In this agreement the seller will come to the table with the original 5% deposit (or $5,000) but the buyer will have to qualify for the entire $100,000 from a traditional lender and come up with the rest of the down payment. This is another form of forced savings option in effect. If the buyers do not qualify for the new loan, the deposit is in no way refunded.
A Lease Option agreement may have one of these options or a combination of them. At Turner Strategy Group we typically use the First option, but terms can generaly be negotiated and customized to fit the individual buyer.
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- Can the landlord sell the property to someone else besides the Lease Option purchaser during the Lease Option period?
No. the only exception is if the current tenants have defaulted on their commitment. If the current tenants have fulfilled their obligations during the lease option timeframe, the owner can not sell the property to anyone else during the lease option.
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- Can I transfer the lease agreement to someone else?
Not without the written consent of the owner.
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- If I can't qualify for a conventional loan at the end of the option, can I get the option extended?
This is entirely at the discretion of the seller. Typically a seller will extend the lease option for 6 to 12 months, but they are not obligated to extend it.
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- Am I obligated to purchase the property If I decide at the end of the Lease Option that I'm no longer interested?
No. You are not obligated under a Lease Option to Purchase, however if the agreement is a Lease Purchase - without the option (see this article for more information on the differences) then yes you are obligated. Understand thought that if you do not exercise the option, you do not get any of the down payment or any portion of the monthly rent refunded.
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